Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. N.J.: Former Jackson Hewitt franchisee enjoined from operating competing tax service, (Nov 2, 2015)

By Michael Menzhuber, J.D., LL.M.

The federal district court in Newark, New Jersey granted Jackson Hewitt Inc. a preliminary injunction against a former franchisee, enjoining him from operating a competing tax service, in violation of the franchise agreement non-compete requirement. In addition to finding that JH showed a likelihood of success on the merits and irreparable harm if the injunction was not granted, the court determined that the balance of hardships and public interest favored granting the injunction (Jackson Hewitt Inc. v. Cline, October 29, 2015, Arleo, M.).

Background. David Cline entered into franchise agreements with JH for the license and operation of four income tax preparation businesses. The franchise agreements provided that JH could terminate the agreements for good cause, including Cline’s failure to pay any sums due under the agreements. The franchise agreements also provided that Cline was obligated to: (1) comply with post-termination obligations which included paying all amounts owed under the agreement, returning all trade secret and confidential materials, deleting all confidential material and client files from computers and hard drives; (2) complying with post-termination covenant not to compete; and (5) authorizing the transfer of telephone numbers to JH.

Cline defaulted on his payment obligations and JH terminated his franchises. Cline, according to JH, continued to operate tax preparation services at the same locations that he operated the Jackson Hewitt franchises. In addition, he also continued to: (1) use JH’s client files and telephone numbers; and (2) retain at least some of the same employees and tax preparers that he used while he was a JH franchisee.

After filing a complaint for various breaches of the franchise agreements, JH filed a motion for a preliminary injunction to require Cline to: (1) adhere to the two-year non-compete provision of the franchise agreement; (2) return all client files to JH; (3) return all trade secret, confidential, and proprietary information; and (4) transfer all JH telephone numbers owned by Cline to JH.

Preliminary Injunction. The court determined that JH satisfied the requirements to be awarded a preliminary injunction because it showed: (1) a likelihood of success on the merits; (2) that it would suffer irreparable harm if the injunction was denied; (3) that granting preliminary relief would not result in a greater harm to the nonmoving party; and (4) that the public interest favored such relief.

According to the court, JH demonstrated a likelihood of success on the merits by showing that Cline: (1) was in violation of the covenant not to compete; (2) failed to comply with his post-termination obligations, and (3) was soliciting, or assisting in the soliciting, of customers associated with the former franchised JH businesses.

JH met its burden of demonstrating irreparable harm because the franchisor showed that harm flowed from Cline’s failure to return all client files and Cline’s potential use or inevitable disclosure of information in those files. The balance of hardships favored JH because: (1) the restrictions of the non-compete provision were reasonable; (2) Cline had accepted the terms of the non-compete provision when he entered into the franchise agreements; and (3) Cline was not prevented from operating a tax service business outside of the restricted geographic area.

Finally, the public would not be impacted by the inability of community members in the restricted geographic area to have their taxes prepared by Cline because there were other tax preparation services in the area.

The case is No. 14-6931.

Attorneys: James Simon Coons (Ansa Assuncao, LLP) for Jackson Hewitt Inc. David G. Cline, pro se.

Companies: Jackson Hewitt Inc.

Cases: FranchisingDistribution NewJerseyNews